3/16/2009 @ 7:25PM

AIG's Bonus Distraction

When word got out that
AIG
, the failed insurer that exists thanks only to $170 billion of taxpayer money, would be paying out $165 million to honor employee retention payouts, the response was swift, sharp and predictable.

President Barack Obama said the government would “pursue every legal avenue to block these bonuses and make the American taxpayers whole.” New York State Attorney General Andrew Cuomo sent a letter Monday to AIG
‘s
management demanding to know if the employees getting the money were involved in the company’s bad bets, and demanded to see the precise terms of the contracts.

Whether it turns out to be political posturing remains an open question. AIG chief
Edward
Liddy
Edward Liddy
told Treasury Secretary Tim Geithner the company’s “hands were tied” and “outside counsel has advised that these are legal, binding obligations of AIG, and there are serious legal, as well as business, consequences for not paying.” According to AIG, they were advised that not only are they obligated to pay by March 15, but if they try to ignore the contracts, the penalty is paying double. AIG says the Connecticut Wage Act, as well as employment laws in France, Japan, the U.K. and Hong Kong, could give employees legal recourse to quit and sue.

Some of the incentives are quite large–seven employees are set to receive $3 million or more, AIG says. Most are more modest; the smallest incentives are only $1,000. Going forward, AIG Financial Product’s top 25 executives have agreed to take $1 salaries for the rest of 2009. AIG says they are mostly unwinding their operation now, and their losses (and hence taxpayer losses) would be even greater if they lost the employees, some of whom have detailed knowledge of AIG’s most complex financial agreements. Paying these guys to stay, unfortunately, may prove more cost effective than paying the company’s lawyers to fight them.

More important, the bonus issue is distracting from a bigger mess: the $44 billion in taxpayer funds AIG paid out to make good on payments due other financial firms. That sum includes $7 billion to
Barclays
, $6.4 billion to
Deutsche Bank
, $4.9 billion to
BNP Paribas
, $3.3 billion to
HSBC
, among others. Many of those payments went, without restriction, to the coffers of the same Wall Street banks who paid out $20 billion in bonuses in 2008.

Don’t expect a change anytime soon, though. In the White House’s daily press briefing, Press Secretary Robert Gibbs was asked continually about bonuses and not once about payments to foreign banks and hedge funds. A Treasury official told Forbes Monday afternoon that the government would add provisions to $30 billion in new bailout funding that would require repaying taxpayers for the bonuses, and said several repayment arrangements were being considered. Payouts for the other firms? No word on that so far.

Ironically, in the case of AIG, government involvement may have exacerbated all these problems. Under a traditional bankruptcy, all of AIG’s obligations would have been up for review, all payouts frozen by a court. Bankruptcy law is a well-established field with rules to proceed. Bailout law is still a gray area. “But for the government bailout, what would have happened to AIG?,” asks Roman Silberfeld, a managing director specializing in complex litigation at Robins, Kaplan, Miller & Ciresi. “It would have ended up in a bankruptcy court somewhere.”